The market drop today on major problem in Europe is exactly why Friday's market failed to rebound. Nobody wanted to go long over the weekend when faced with Europe risk.
The sudden downturn in Europe produced significant declines on Monday and that carried over into our markets on Tuesday. This is exactly what traders were trying to avoid when they avoided buying the dip on Friday. There were simply too many risks in multiple countries plus the worries over the bank lawsuits. The overhang from Europe knocked the Dow to a -307 point at the open. That is not the kind of gap open the bulls wanted to fight.
The opening drop came despite the better than expected economics in the USA. The ISM Nonmanufacturing Index actually ROSE to 53.3 for August compared to an expected decline to 51.1 compared to the 52.7 reading in July. This was a major shock for analysts and suggests the soft patch was just temporary.
The internal components showed only a slight improvement but it was an improvement. New orders rose +1.1 points to 52.8. Imports rose from 47.5 to 53.5 and exports from 49.0 to 56.5. Employment declined to 51.6 from 52.5 but anything over 50 is still in expansion territory. Unfortunately backorders, a sentiment indicator of future activity, rose to 47.5 from 44.0 but remains in contraction territory.
The headline number averaged about 53.1 for the quarter and that is still growth even if it is very slow. The average for Q2 was 53.6 so there has not been a significant decline in activity. Consumer spending remains unexpectedly high and that suggests consumer attitudes in the confidence/sentiment surveys is not translating to a decline in activity.
ISM Nonmanufacturing Chart
The economic calendar for the rest of the week is highlighted by the Fed Beige Book on Wednesday and the president's job speech on Thursday. The Beige Book is the most important report for the week. It is the summary of financial conditions in each the regional Fed regions. It would be nice to see them say something good but just not saying anything negative would also be market positive.
In stock news the foul mouthed CEO of Yahoo, Carol Bartz, is no longer CEO according to reports on the web. She has been replaced by Yahoo CFO Tim Morse as interim CEO. Chairman Roy Bostock called Bartz on the phone and told her she had been replaced. Bartz was brought in to turn the company around in January 2009 with the share price at $12.50. That is exactly where it was trading today then the news was released.
Bargain dealer Groupon put its $750 million IPO on hold for multiple reasons. Several high profile companies including Zynga and Facebook have put IPO plans on hold until the market improves. Groupon has another reason. Since they filed for their IPO the SEC and others have questioned its accounting practices that exclude marketing and other expenses from its profit calculations. There are also worries that the daily deal market has suddenly been saturated. Several companies have either narrowed their focus or reduced their number of deals and some have even cancelled their services. Facebook ended its Deals business after only four months and Yelp's CEO said this week that some local businesses think the daily deals are "uneconomic" and raising questions about the sustainability of the model. There are worries that Groupon has also seen business shrink as a result.
Sprint (S) sued AT&T (T) to halt the acquisition of T-Mobile. Sprint said the combination would lead to higher prices for consumers and create a duopoly between AT&T and Verizon. Sprint called the potential acquisition "brazenly anticompetitive." The suit was assigned to the same judge currently handling the Justice Department's suit to block the merger. If AT&T can't get approval for the merger they will have to pay a $6 billion breakup fee to T-Mobile parent Deutsche Telekom. Whoever agreed to that fee at AT&T needs to be institutionalized since there was always a good chance the antitrust concerns could block the deal.
The Nvidia (NVDA) CEO shook up things this afternoon when he raised guidance sales and profits for years into the future. CEO Jen-Hsun Huang said Android tablets running quad-core processors will be available later this year. Since this year only has a little less than four months remaining that is a big claim. He expects the company to expand its smart phone processor capability into regular phones with sales of one billion by 2015. Today Nvidia has sales of $4.5 billion in its GPU business and $2 billion in mobile processors. By 2015 he expects that to reverse to a whopping $20 billion in mobile processors and $7 billion in GPUs. The stock rallied to $14 in after hours.
The banks did not do as bad today as I expected after the bombshell FHFA lawsuit was announced last Friday. There were some extreme analysts worried over some future bank bankruptcies but I doubt anyone gave them any credibility. Most believe the suits will be settled before they every go to trial simply because the burden of proof for Fannie and Freddie is so high. This is a hail Mary pass by the FHFA in hopes of recovering some of its losses. JPM, the second highest suit at $33 billion only declined -1.19. BAC lost -0.26 and MS -0.63. The European banks were hit harder but some of that decline was due to events in Europe over the weekend. Deutsche Bank (DB) lost -2.69 and Credit Suisse (CS) -3.54. Overall the U.S. banks are very well capitalized today and the suits, if they make it to court, will take years and could end with minor settlements because of the high burden of proof. The fact they sued 17 banks suggests the case has weakness. There is no way 17 global banks falsified documents and committed fraud on this scale. One or two banks maybe but not 17. The KBW Banking Index only lost -1.7%. Time to buy banks?
KBW Banking Index Chart
The northeast is still cleaning up after hurricane Irene and it looks like they might have dodged a bullet with Katia. The storm dropped back from a category three to a category two and the new storm track is showing a sharp turn northeastward and it is now expected to miss land altogether. Unfortunately there are three more storms developing in the south. It will be days before any develop into problems but this is the heart of the hurricane season.
Katia Storm Track
Gulf Storm Chart
Crude prices were extremely erratic with WTI crude falling to $82. In theory this was due to the economic weakness in Europe but WTI does not go to Europe. This was really just traders raising cash to cover margin calls on equities.
In Europe the price of Brent rallied +3.27 so obviously there were no worries over lack of demand. The daily news out of Libya continues to push back the dates when any material production will be resumed. This is a daily news cycle and multiple people making unrelated statements to the press in an effort to increase their stature in the new Libyan political order. Expect continued volatility but also expect the price to continue to rise. In the last IEA/OPEC reports they estimated a continued 688,000 bpd shortfall in light crude for Q3. The shortfall is being made up by depleting existing supplies in Europe an Asia.
There was also news of some delayed tanker loadings in the North Sea. Brent is short and the price will continue to show that.
This has led to a new historical high on the spread between WTI and Brent at nearly $30 today.
U.S. WTI Crude Chart
Brent Crude Oil Chart
Without going into too much detail over Europe let's just say conditions are continuing to worsen. German Chancellor Merkel had some problems over the weekend with some local elections that did not turn out well for her party. Holding together the country with fragmenting support because of the bailouts could be a challenge.
The German court is supposed to rule on the constitutionality of the bailouts and it could happen on Wednesday. Chancellor Merkel is expected to address Parliament on Wednesday, also before our open.
There are many conflicting views on whether the constitutional vote will pass and if it does pass it will still have to be voted on by the parliament. With Merkel's political fortunes declining she may not be able to get it passed in parliament.
Greece and Italy were in the news all weekend with more analysts predicting a Greek default. Some European finance ministers were quoted as saying they may need to let some countries leave the union. Others were quoted as saying you should not rule out sovereign debt defaults despite the bailouts. Southerners in Italy are striking to protest austerity.
There are so many events and complexities swirling in Europe there is no way to predict the outcome other than the odds are good the problems will not go away. This will keep the region under economic stress and could lead to a global recession.
These problems in Europe make the U.S. markets the safe haven for investors. The ten-year Treasury note yields declined to another new low at 1.979% after dipping to an intraday low of 1.929%.
Gold prices set a new intraday high at $1923 before settling back to close at $1872 on some serious intraday volatility. Is this a double top? Most analysts believe we will still see a further rally to $2000-$2100 simply because of the economic and geopolitical instability. With central banks trying to find some way to diversify their reserves without currency risk, adding gold appears to be the answer. The Swiss National Bank set a ceiling on the franc today and the currency crashed. Traders long the franc were crushed. The Euro spiked nearly 10% against the franc and the dollar gained nearly 8%.
In theory this flight to safety should benefit U.S. equities but we need to get past the current rough patch before investors will have the confidence to buy stocks. So far the three-day decline in September is the worst start on record since WWII.
The S&P dipped to 1140 intraday (-33) before it rebounded +25 points to close with only a minor eight-point loss. When you consider the ugly news on Friday and the turmoil in Europe this was a very positive rebound. The events in Germany overnight tonight probably kept the markets from rebounding to positive territory. Like Friday, investors did not want to be heavily long as those critical events occurred.
The S&P rebound back above prior support at 1160 was a strong plus when it could have just as easily fallen to 1120 or even lower. This is a bullish sign assuming no German problems tomorrow.
The Dow rebounded from its -308 point loss to end only down -100. Yes, there is a positive spin to only a 100-point loss. Only three Dow components were positive, JNJ, CAT, PFE, but the losses on the majority were less than 50-cents each. Technology and banking led the losers list.
The Dow closed well above 11,000 after a dip to 10,932 and that should attract new buyers on Wednesday.
The Nasdaq closed +60 points off its lows. Also, it had a good opportunity to test support at 2400 and failed to reach that level. The Nvidia news should be a positive boost to the market on Wednesday even though the semiconductor industry lowered expectations today. This is normally a weak month for tech stocks but they are already seriously oversold.
The rebound before testing support today was bullish. If tech stocks can post a rally on Wednesday back over 2500 it should attract new buyers.
Where to from here? The late August rally was almost completely erased. Conditions reversed from overbought to oversold and after three consecutive days of triple digit declines it is time for a bounce.
The governing factor for Wednesday is Europe and we can't do anything but watch but I believe further dips will be bought. Europe will get worse before it gets better but that is quickly being priced into the market.
The Fed is more than likely going to take action on September 20th. It may not be QE3 but they can't afford to stand by and wait to see if the economy is going to crash and burn or just limp forward for money to come. They need to act now to prevent a future collapse. Unfortunately their actions will be more psychologically than physically stimulative but any stimulation will help.
The president's speech may provide a boost to sentiment but it is not likely to provide any real impact since anything he proposes has to be passed by Congress. Still the speech could be market positive unless it is full of partisan attacks.
Why buy? September is normally ugly and there are definitely plenty of roadblocks in the global path. At least 75% of the analysts on TV are now calling for lower lows before the end of October. With that much bearish sentiment it may be a challenge to put money to work. Fortunately fund managers look for exactly that kind of sentiment as a buy signal.
I can't tell you September will finish higher than it is today but I do think we are long term oversold. The August volatility should have shaken out those investors who were on the fence with no clear expectations.
Fund managers need to make up lost ground. They have had a rough year with some high profile hedge funds down more than 25%. Bonuses are at risk and that calls for aggressive action. I think they will buy the dips with increasing bullishness. I could be completely wrong. Europe could spiral down the drain and take our markets with it. That is a chance we have to take. That is why they made stop losses.
If you want to nibble on the dips please do so with smaller positions and please use stops. I could be right about the direction but wrong about the timing. Please use stops.
In the "you can't make this stuff up" department the state of Michigan is now offering food stamps and government assistance in three languages. English, Spanish and â€¦ drum roll pleaseâ€¦ Arabic. It seem there is such a large number of Arabic speaking people asking for government assistance in Michigan they had to include it as an official language on the state's website. There are so many ways I could rail on this but in the interest of time I will just post the links.
Notification of calendar changes
Food Stamps Overview
Coming soon: "Hello, welcome to (Your Government Agency Here). For assistance in English press 1, for assistance in Spanish press 2, for assistance in Arabic press 3, Chinese press 4, Korean press 5, Russian 6, etc." Your visit to the local fast food drive in is about to become more complicated as well. Now they can only mess up your order in two languages. What happens when it spreads to 5 or 6 more? Why can't learning the English language be a prerequisite for immigration? Secondly, why can't the ability to pay for your own food and housing also be a requirement?
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